DECISION On Minimum Standards for Risks Management in Micro-Credit Financial Institutions. 1. General Provision. Subject matter

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1 Pursuant to Article 17, paragraph 1, point 2 of the Central Bank of Montenegro Law (OGRM 52/00, 47/01) and Article 157, paragraph 2 of the Banking Law (OGRM 17/08), the Council of the Central Bank of Montenegro, at its meeting held on 23 and 24 February 2009, passed the following DECISION On Minimum Standards for Risks Management in Micro-Credit Financial Institutions 1. General Provision Subject matter Article 1 This Decision shall regulate in more details minimum standards for risks management in micro-credit financial institutions. 2. Risks management Type of risks Article 2 Micro-credit financial institution (hereinafter: MFI) shall properly identify, measure, monitor and control all risks in their operations, and particularly: 1) Credit risk; 2) Liquidity risk; 3) Market risks, and 4) Operational risk. Risks management system Article 3 A MFI shall establish system for management of all risks to which it is exposed during its operations. The system comprises: 1) risks management strategy; 2) policies, rules and procedures for: Identifying sources of risks, measuring risks, by their accurate and timely assessment, monitoring risks by analysing condition, changes and trends of the exposure to risks, Controlling the risk, by maintaining it the level acceptable to the MFI s risk profile, or by reducing and/or eliminating it; 3) Defined powers and responsibilities in the process of risk taking and risk management; 4) System of reporting and informing on risks management.

2 2.1. Credit risk Rules and procedures for risk management Article 4 Rules and procedures for the credit risk management shall, as a minimum, include: 1) Detailed rules for granting loans, which shall, as a minimum, define the obligation of MFI to obtain, when granting loan, information on: the financial condition of the loan applicant, the purpose of the loan, sources of loan repayment, value of the collateral; 2) Procedures for monitoring the structure and quality of loan portfolio managed by MFI; 3) Procedures for timely taking of activities aimed at improving loan portfolio position, especially of non-performing assets, including procedures for recontracting, and in particular the situation of non-performing assets, including also re-negotiating procedures and/or loan restructuring, or implementation of other measures aimed at reducing MFI losses to a minimum; 4) Procedures for the collection of principal, interests and fees on loans, which ensure timely collection under contracted terms and conditions, and which in case of default, provide fast examination of reasons for default, monitoring of default status and real valuation of the MFI s exposure to credit risk against nonperforming debtors. Analysis of loan application Article 5 When analysing the application for granting a loan, MFI shall, as a minimum: 1) Determine the purpose of the loan; 2) Assess creditworthiness of the loan applicant, collateral quality and influence of other factors relevant for the measurement of exposure to the credit risk. Before granting a loan or other exposure, MFI shall obtain written statement from the borrower, containing information about all of the borrower s related interests to other parties, and a commitment from the borrower to keep the MFI informed on any changes that may affect the amount of the MFI s exposure to that borrower. Loan file Article 6 MFI shall ensure that each loan is properly and accurately documented and that regular and full loan file is established and maintained, which chronologically follows-up granting and the quality of the loan granted, up to its final repayment or other form of debt regulation. Loan file must, as a minimum, contain documents, data and information on: 1) Identity of loan beneficiary and its related parties as his guarantors; 2) For legal entities and entrepreneurs legal capacity of these entities to borrow (evidence on entry into court or other corresponding register); 3) Financial condition of the loan beneficiary and its capacity for loan repayment, and the dynamics and sources of loan repayment; 4) Purpose of the loan granted and earmarked use of the funds used.

3 Exposure to a single party Article 7 Total MFI s receivables towards a single party may be up to 10% of the MFI s capital, whereby: 1) Total receivables to a single company, entrepreneur or natural person may not exceed EUR ; 2) Receivables to natural person based on the first loan or lease granted may not exceed EUR 5.000; 3) Receivables to a company or entrepreneur based on the first loan or lease granted may not exceed EUR Total receivables to a single party, within the meaning of paragraph 1 above, shall be total MFI s receivable based on loan and/or financial leasing: 1) To such natural person, and/or entrepreneur and members of his family (spouse and children who live in economic community with him); To such company and other parties which make a group of related parties with that company. Asset classification Article 8 By implementing criteria past due, MFI shall, at least once in a month, classify assets, according to which it is exposed to the credit risk, into the corresponding classification category or sub-category and create adequate provisions for potential losses, in minimum percentages as described in the table below: Days past due Classification category or subcategory Minimum provision requirement Up to 30 days A 0 % From 31 to 45 days B1 3 % From 46 to 60 days B2 8% From 61 to 80 days C1 20% From 81 to 100 days C2 30% From 101 to 120 days C3 40% From 121 to 150 days C4 50% From 151 to 180 days D 75% Over 180 days E 100% Suspension of Interest Atricle 9 As of the moment of classification, MFI shall register as off-balance accrued interest on asset item classified in classification group C or lower (hereinafter (non-performing assets).

4 MFI shall suspend accrued outstanding interest on non-performing asstes, unless that asset item is secured by a good collateral, and is in the prosess of enforcement, with expectation that enforcement of claims will be performed in due time, not longer than three months. In the process of asset item classification, MFi shall classify the interest from paragraph 1 of this Article in the classification group E loss. Capital to borrowed assets ratio Article 10 MFI shall maintain capital to borrowed assets ratio at the money market which is adequate to the MFI s risk profile, whereby the amount of assets which MFI obtains at the money market may not exceed 500% of MFI s capital. The Central Bank of Montenegro (hereinafter: the Central Bank) may, in case it is determined that MFI does not adequately manage credit and other risks, order MFI to provide in due time stricter capital to borrowed assets ratio than the one prescribed in paragraph 1 above Liquidity risk Risk management system Article 11 MFI shall establish a system for liquidity risk management, which provides: 1) Identification of the existing sources of liquidity risk and the liquidity risk which may arise from new business products and activities; 2) monitoring of maturity structure of placement and sources of funds; 3) monitoring of contingent liabilities recorded off-balance; 4) the projection of cash inflows and outflows; 5) the use of financial instruments for establishing adequate structure of funds and sources of funds; 6) creation of liquidity indicators and their use in the process of monitoring of liquidity; 7) Adequate treatment in case of temporary and long-term liquidity distortions. Maturity match of receivables and liabilities Article 12 MFI shall maintain maturity match of receivables and liabilities, including contingent offbalance sheet liabilities.

5 Informing the Central Bank Article 13 MFI shall, in case of illiquidity, immediately inform the Central Bank on the amount of missing liquidity funds, reasons for illiquidity and planned activities for illiquidity overcoming Market risk Types of risk Article 14 MFI shall manage market risks to which it is exposed in its operations, including: 1) Position risks arising from investments in short-term securities, and 2) Foreign exchange risk. Limiting exposure to position risks Article 15 MFI, which is involved in the purchase of short-term securities, shall determine limits for total investments in short-term securities, with regard to: 1) Stability and level of income; 2) Real plans of income and expenses; 3) The level of liquidity; 4) The level of capital; 5) Risk management quality. Foreign exchange risk Article 16 In the process of management of foreign exchange risk, MFI, which is exposed to such risk, shall: 1) Measure FX risk for all items from which that risk arises; 2) Measure and limit FX risk at the aggregate level and individually by currencies; 3) Measure the risk on the basis of assumptions on normally expected and large changes in exchange rates, for the purpose of assessing their impact on income and capital of MFI. Limits of exposure to FX risk Article 17 MFI shall establish limits for: 1) Net open FX position, individually by currencies and aggregately for all currencies; 2) Long FX position, individually by currencies and aggregately for all currencies; 3) Short FX position, individually by currencies and aggregately for all currencies.

6 2.4. Operational Risk Risk identification Article 18 In the process of identification of operational risk sources, MFI shall identify all sources of operational risk, bearing in mind, in particular, risks arising from: inadequate information and other systems, distortions in operations and failure of information and other systems, illegal and inadequate actions taken by employees, actions which may cause court and other disputes against MFI, external illegal actions and natural and other events that may not be predicted. Risk measurement and control Article 19 After the identification of the specific source of operational risk, MFI shall assess the level of that risk by applying the adequate measurement methods. Depending on the nature and level of the specific operational risk, MFI shall apply corresponding methods for its reduction and/or elimination, or for its monitoring and control. Data protection Article 20 MFI shall establish the process of management of data backup, which includes the process of creation, placement and testing of data backup and restoration of data from data backup, in order to provide availability of data in case of need and enable recovery and/or reestablishment of vital business processes within the time required. Data backup must be updated and stored in an adequate manner, at one or more backup locations, of which at least one must be in accordance with the risk assessment, sufficiently distant from the location where the original data are kept. Informing the Central Bank Article 21 MFI shall create database on all losses arising from the operational risk and determine methodology for the internal recording of such losses, by categories determined according to the sources of losses. MFI shall inform the Central Bank on all losses arising from the operational risk, as well as on the amount and reasons of the loss occurrence, within eight days from the day the loss occured.

7 3. Final provisions Article 22 Decision on Micro-Credit Financial Institutions (OGRM 01/03 and OGRM 09/07) shall be repealed on the day of entry of this Decision into force. Article 23 This Decision shall entry into force on the eighth day following that of its publication in the Official Gazette of the Republic of Montenegro. THE COUNCIL OF THE CENTRAL BANK OF MONTENEGRO PREDSIDENT Decision No /2-28 Podgorica, 24 February 2009 Ljubisa Krgovic